Forecasting

Forecasting is the art and science of

predicting future events of business
 Why Forecast?
◆ Lead times require that decisions be made
in advance of uncertain events.
◆ Forecasting is an important for all strategic
and planning decisions in a supply chain.
◆ Forecasts of product demand, materials,
labor, financing are an important inputs to
scheduling, acquiring resources, and
determining resource requirements.
 Demand Management
◆ Demand management is the interface
between manufacturing planning and control
and the marketplace. Activities include:
◆ Forecasting.

◆ Order Processing.

◆ Making delivery promises.

 Demand Management
Resource Production
Planning Planning

Marketplace Demand Mgt.

Master
Production
Planning
 Forecasting Horizons.
◆ Short Term (0 to 3 months): for inventory
management and scheduling.
◆ Medium Term (3 months to 2 years): for
production planning, purchasing, and
distribution.
◆ Long Term (2 years and more): for
capacity planning, facility location, and
strategic planning.
 Principles of Forecasting
◆ Forecasts are almost always wrong.
◆ Every forecast should include an estimate of
the forecast error.
◆ The greater the degree of aggregation, the
more accurate the forecast.
◆ Long-term forecasts are usually less
accurate than short-term forecasts.
 Forecasting Methods
◆ Qualitative methods are subjective in nature since
they rely on human judgment and opinion.
◆ Quantitative methods use mathematical or
simulation models based on historical demand or
relationships between variables.
 Some Qualitative Methods
 Jury of Executive Opinion (opinions of a small group of
high-level managers is pooled).
 Sales Force Composite (aggregation of salespersons estimate
of sales in their territory).
 Market Research Method (solicit input from customers or
potential customers regarding future purchasing plans).
 Delphi Method (a forecasting group uses a staff to prepare,
distribute, collect, and summarize a series of questionnaires
and survey results from geographically dispersed
respondents, whose judgements are valued).
 Quantitative Forecast
Methods
◆ Time Series Methods use historical data extrapolated into
the future. They are best suited for stable environments.
Moving averages, exponential smoothing methods, time
series decomposition, and Box-Jenkins Methods.
◆ Causal Methods assume demand is highly correlated with
certain environmental factors (indicators). Correlation
methods, regression models, and econometric models.
◆ Simulation Methods imitate the consumer choices that
give rise to demand to arrive at a forecast.
 Time Series Demand Model
◆ Observed Demand = Systematic Component + Random
Component.

◆ Systematic Component measures the expected value of

demand and consists of:
◆Level: the current deseasonalized demand.
◆Trend: the rate of growth or decline in demand.
◆Seasonality: the regular periodic oscillation in demand.

◆ Random Component is that part of demand that follows no

discernable or predictable pattern.The random component is
estimated by the forecast error (forecast – actual demand).
 Ninety Types of Demand
Measurement (6 x 5 x 3)
World
Space INDIA
level Region
Territory
Customer
All sales
Industry sales
Product Company sales
level Product line sales
Product form sales
Product item sales
Short run Medium run Long run

Time level
 Basic Forecasting Approach
◆ Understand the forecasting objective. What decisions
will be made from the forecasts? What parties in the
supply chain will be affected by the decision.
◆ Integrate demand planning and forecasting. All planning
activities within the supply chain that will use the forecast
or influence demand should be linked.
◆ Identify factors that influence the demand forecast. Is
demand growing or declining? Is there are relationship
(complementary or substitution) between products?
 Forecasting Approach (cont.)
◆ Understand and Identify customer segments. Customer
demand can be separately forecast for different segments
based on service requirements, volume, order frequency,
volatility, etc.
◆ Determine the appropriate forecasting technique.
Typically, using a combination of the different techniques
is of the the most effective approach.
◆ Establish performance and error measures. Forecasts
need to be monitored for their accuracy and timeliness.
 Time Series Forecasting
 Static
 Assume estimates of level, trend, and
seasonality do not vary as new data is observed.
 Adaptive
 Update forecast as new data becomes available
 Time Series Forecasting
◆ Static
◆ Adaptive
◆ Moving average
◆ Single exponential smoothing
◆ Trend-adjusted exponential smoothing (Holt’s)
◆ Trend & Seasonal adjusted exponential
smoothing (Winter’s)
 Static Forecasting (steps)
1. Determine periodicity (even or odd?)
2. Deseasonalize data
3. Find the equation of the trend line
a. Simple linear regression
b. Independent variable (period)
c. Dependent variable (deseasonalized data)
4. Estimate seasonalized factors
a. Per period
b. Index (Averages)
5. Forecast
 Find the equation of the line
◆ Use simple regression
◆ Excel: (Tools/Data Analysis/Regression)
◆ Dependent variable (y) is deseasonalized
demand
◆ Independent variable (x) is period t
◆ y= intercept + slope * x = demand

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